The Financial Industry Regulatory Authority intends to field an enforcement team tasked with focusing on brokers whose records show patterns of complaints or sales abuses. The team will review both the quality of a firm’s due diligence in the hiring process and in monitoring higher risk brokers. For instance, scrutiny will be paid to whether firms placed problem brokers under heightened supervision. In a letter detailing its regulatory priorities for 2014, FINRA also stated, “Examiners will place particular focus on these brokers’ clients’ accounts in conducting reviews of sales practices.”
Nomadic Brokers and Broker Migration
Of particular interest to us is FINRA’s expression of concern about a phenomenon we refer to as “nomadic” brokers: i.e., brokers who wander through the industry, seemingly switching employers every year or two. FINRA recognized the risks posed by brokers who used to work at firms that have been severely disciplined by the regulator, and who may bring illegal or unethical practices to their new employers. FINRA apparently uses what it calls a “broker migration” model to identify and monitor brokers who move to another firm and drag behind them a record of disciplinary actions. FINRA also looks more closely at firms that hire these high-risk brokers.
Many times we find that a broker who has harmed our client had an extensive history of complaints and disciplinary actions. The same broker often will have long lists of prior jobs, from which we infer that he or she had frequently been terminated or told to “resign.” Consequently, this heightened supervision by FINRA is good news for investors, as it may enable FINRA to weed out more bad brokers and to do so earlier in their careers.
Hugh Berkson is a Securities Attorney with McCarthy, Lebit, Crystal & Liffman, Co. LPA. Hugh is rated AV® Preeminent™ by Martindale-Hubbell®.
He obtained a business degree in Finance from the University of Texas at Austin in 1989, and is a 1994 graduate of Case Western Reserve University School of Law, where he was a member of the Order of the Barristers and received both the American Jurisprudence Award, (National Mock Trial) in 1993 and the Jonathan M. Ault Mock Trial Prize for 1993-1994.